DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2022

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to fluctuations in crude oil and natural gas prices on its production. It utilizes derivative strategies that consist of either a single derivative instrument or a combination of instruments to manage the variability in cash flows associated with the forecasted sale of its future domestic oil and natural gas production. While the use of derivative instruments may limit or partially reduce the downside risk of adverse commodity price movements, the use also may limit future income from favorable commodity price movements.

The Company’s derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying balance sheets. The Company has not designated its derivative financial instruments as hedges for accounting purposes, and, as a result, any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of “Other income (expense)” under the heading “Gain (loss) on derivative contracts” in the accompanying Statements of Operations.

The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. At March 31, 2022, 100% of the Company’s volumes subject to derivative instruments are with lenders under its Credit Facility (as defined in Note 8). The Company is not subject to master netting agreements and classifies

the fair value of its derivative positions on a gross basis in its corresponding balance sheets. The following presents the impact of the Company’s contracts on its balance sheets for the periods indicated.

	As of
	March 31, 2022		December 31, 2021
Commodity derivative instruments	$	42,722,228	$	29,241,588
Derivative liabilities, current	$	42,722,228	$	29,241,588

The components of “(Loss) on derivative contracts” are as follows for the respective periods:

	Three Months Ended
	March 31,
	2022		2021
(Loss) on oil derivative	$	(27,596,141)	$	(31,389,950)
(Loss) on natural gas derivatives		—		(198,689)
(Loss) on derivative contracts	$	(27,596,141)	$	(31,588,639)

The components of “Cash (paid) for derivative settlements” are as follows for the respective periods:

	Three Months Ended
	March 31,
	2022		2021
Cash flows from operating activites:
Cash (paid) on oil derivatives	$	(14,115,501)	$	(6,663,969)
Cash received on natural gas derivatives		—		743,178
Cash (paid) for derivative settlements, net	$	(14,115,501)	$	(5,920,791)

During 2020, 2021, and early 2022, the Company entered into additional derivative contracts in the form of swaps for the 2022 calendar period for oil. The following tables reflect the details of current contracts as of March 31, 2022:

Date entered into	Period covered	Barrels per day		Swap price
Oil derivative contracts: 2022 swaps
12/4/2020	Calendar year 2022	500		$	44.22
12/7/2020	Calendar year 2022	500			44.75
12/10/2020	Calendar year 2022	500			44.97
12/17/2020	Calendar year 2022	250			45.98
1/4/2021	Calendar year 2022	250			47.00
2/4/2021	Calendar year 2022	250			50.05
5/11/2021	Calendar year 2022	879	(1)		49.03
2/1/2022	Balance of calendar year 2022	1,000			83.47

(1) The notional quantity per the swap contract entered into on May 11, 2021 is for 26,750 barrels of oil per month. The 879 represents the daily amount on an annual basis.